Investors: Should June 15 Instalment Payment Be Adjusted?

In a volatile marketplace, investors, small business owners and seniors should keep a tight rein on their quarterly instalment payments. Now is a good time for tax advisors to consult with their clients to ensure there is no capital encroachment as a result of a mistaken overpayment to the upcoming quarterly instalment. An estimation of the income for the year can be used as an instalment base.

Current-Year Option

Under this option, the taxpayer's income tax liability for the current taxation year is estimated and, if the estimate exceeds $2,000, then one-quarter of the estimated amount is due on each of the four due dates.

Prior-Year Option

Under this option, the first two instalments are estimated at one-quarter of the taxes due in the second prior year (since the prior year's return is not available when these instalments are due) and the last two instalments are calculated at one-half of the excess of taxes due in the prior year over taxes due in the second prior year.

Issue: In the prior two years, Peter's taxes owing when he filed his return were as follows:

Last year: $3,500

Year before last: $4,000

At what amounts would Peter's quarterly instalment payments be under each option?

Answer: Using the Prior-Year Option, Peter's first two instalment payments are $1,000 (= $4,000/4) and his third and fourth instalments are $750 each (= ($3,500 - $1,000 - $1,000) / 2).

If Peter estimates that his current year tax liability will be $3,400 he may use the current-year option and make instalment payments of $850 ($3,400/4) each quarter.